4pm

Corruption watchdog attacks handling of BAE inquiry

The inquiry centred on allegations over the sale of Eurofighter jets to Saudi Arabia. Photograph: EPA

The British government was harshly rebuked today by the world's leading anti-bribery watchdog over its decision to terminate a major corruption investigation into the UK's biggest arms company, BAE.

The watchdog stepped up the pressure on ministers by deciding to send international inspectors to London to find out why the Serious Fraud Office investigation into Saudi arms deals was stopped.

The inspectors are expected to question Lord Goldsmith, the attorney general, and other senior officials.

They will also investigate why Britain signed up to a global treaty outlawing the payment of bribes to foreign politicians and officials in 1998, but has so far failed to prosecute any British companies for these offences.

The inspectors will be sent by the Organisation for Economic Co-operation and Development, which enforces the treaty.

The OECD said Britain's laws to stamp out overseas corruption were deficient and had shortcomings. It added that it had "serious concerns" that the BAE decision had broken the treaty.

During a three-day closed meeting in Paris, British officials, including Jonathan Jones, the attorney general's most senior aide, lobbied furiously to prevent the new inspection and to water down the criticism.

Tony Blair has taken full responsibility for closing down the SFO investigation into allegations that BAE has paid huge bribes to Saudi royals to win arms deals. He claimed that Britain had done more than any other country in recent years to root out corruption.

Today's move by the OECD means that the controversy over the ending of the SFO investigation will not melt away. The OECD inspectors will publish their findings when they have completed their inquiries, although this could take up to a year.

Ministers are already facing a challenge in the high court over the decision to kill off the SFO investigation. The Campaign Against the Arms Trade and the environmentalist group, the Corner House, have launched a legal action to prove that the decision was unlawful or illegal.

In today's statement, agreed by diplomats from 35 countries, the OECD said that two years ago, it had recommended that Britain modernise its bribery laws "at the earliest possible date..(We are) seriously concerned that this recommendation, which reflected deficiencies in UK law on foreign bribery, remains unimplemented."

The diplomats added that the halting of the BAE investigation had "further highlighted" their concerns. Under the treaty, governments are barred from terminating prosecutions on the grounds that they would harm relations with other states.

British officials argued at the Paris meeting that ministers did not break the treaty because the government halted the SFO inquiry for another reason - that it would have damaged Britain's national security. This is not expressly outlawed under the treaty, they said.

Mr Blair claimed that the SFO's two-year-old inquiry, if it had continued, would have had a "devastating" impact on Britain's relationship with an important ally "with whom we cooperate closely on terrorism, on security, on the Middle East peace process".

He has claimed that the Saudis were threatening to stop supplying crucial intelligence on al-Qiada terrorists.

This argument gained some sympathy among the diplomats at the Paris meeting, according to a source close to the discussions.

However, another source said that some officials at the OECD meeting are "very worried" that if this argument is accepted and Britain is let off lightly, then other governments would feel emboldened to trot out these kinds of "national security" claims, which may be false, to justify ending prosecutions of companies in their own countries, further undermining the treaty.

It is the second time that the OECD has criticised the British government for not investigating the BAE allegations properly. After an earlier inquiry, OECD inspectors said two years ago that they had "a number of serious concerns" about the way the British government was investigating the allegations that BAE had bribed the Saudis.

One was that the British government was very slow to start an investigation in the first place. The other was that the allegations were not investigated for a long time because the British government feared Saudis would end the lucrative arms contracts and jobs would be lost.